Principles of Islamic Economics: Faith-Based Economic System

1. Islamic Economic Principles

2. Religion of Islam • Islam: submission to the will of God • Emerged 1400 years ago in Arabia • Within 100 years, it expended to Persia, Fertile Crescent, India, North Africa, and southern Spain

3. Prophet Mohammed • He traveled across Arabia and Syria, learning about trade and religion • He married one of the richest women of his tribe and managed her business

4. Islamic Economic Principles Economic System: • Capitalism: Private ownership and profit-making motive from trade • Socialism: State control of resources and income redistribution • Altruism: Voluntary redistribution of income & wealth through charity contributions

5. Islamic Economic Principles Property Rights: • God has created the earth for people to use • Man can use the land to produce food • Labor must be rewarded for the value of his work

6. Religion of Islam Profit Motive: • Business and trade are encouraged • Businessman should use profits to build an affluent life and to help the poor & needy

7. Islamic Economic Principles Taxation: • Zakat: A generalized wealth tax • Ushr: A property tax depending of the quality of land • Kharaj: An income tax on revenues from land • Jizyah: A protection tax payable by non-Muslims Note: only Zakat is Quranic

8. Islamic Economic Principles Family Law: brides are entitled to dowry with full property rights. They receive • Deferred Dowry: Monetary obligation of groom to bride in case of divorce • Prompt Dowry: Payment from the groom to bride family to finalize the marriage agreement • Gifts from parents & others to the bride for starting a family

9. Islamic Economic Principles Inheritance Law: • One could transfer up to 1/3 of his/her property if desired • Only immediate family members could bequeath property • Government takes the property in case of no legal inheritors

10. Islamic Economic Principles Inheritance Law: • The inheritors must pay property taxes • Both male & female can inherit property • The inheritance share of a female is ½ of the share of a male with similar rank • Women have full property rights over their bequest, but men must provide for family members

11. Islamic Economic Principles Example of Inheritance Distribution: one widow, one son, and one daughter • Share of widow = 1/8 or 12.5% • Share of son = 7/8 * 2/3 = 7/12 or 58.3% • Share of daughter = 7/8 * 1/3 = 7/24 or 29.2%

12. Islamic Economic Principles The taking of interest (riba) is sinful: • Exploitation of borrower by lender because money is not earned from labor • Increasing concentration of money in the hands of wealthy money lenders • Interest is earned from a riskless venture as borrower loses collateral in case of loan default

13. Islamic Economic Principles Islamic banking system: • Depositors share profit/loss of the bank • Bank provides interest-free loans, but adds a % service charge

14. Islamic Economic Principles Islamic banking system: • Bank buys equipment for a business and adds a % mark-up to the price. After a certain time period, business has the option to buy the equipment from the bank • Bank and business enter a joint investment venture and share the profit/loss

15. Islamic Economic Principles Economic Development Funds: • Oil-rich countries (e.g., Saudi Arabia & UAE) provide grants and interest-free loans to finance developmental projects and plans in Third World countries